Higher yields. The upswing in long-end bond yields has continued. A combination of factors looks to be at play. FX markets were subdued overnight.
Data flow. BoE hiked rates by another 25bps, but the tightening phase could be nearing the end. RBA Statement on Monetary Policy released today.
US payrolls. US labour market data released tonight. Another solid jobs report could see pricing for another US Fed rate rise lift.
The extension of the sell-off in global bonds has been a feature of markets. Long-end rates continue to lead the way with the US 10-year yield up another ~10bps. At ~4.18% the US 10-year yield is around its highest level since last November, some ~46bps above where it was trading in mid-June. This has helped to re-steepen the US yield curve, though the 2s10s spread remains in negative territory. A combination of factors looks to be behind the renewed upswing in yields including the resilience in the US economy, some fiscal worries stemming from the downgrade of the US’ credit rating by Fitch, the US’ burgeoning bond supply due to its very large ongoing budget deficits, and spillover impacts from the BoJ’s recent tweak to its yield curve control policy. Japan’s 10-year yield has continued to edge higher, hitting ~0.66% yesterday (a high in nearly a decade) before the BoJ stepped in again to ‘smooth’ things out. On the US data front, weekly initial jobless claims remained at low levels, indicative of a still tight labour market, and although the services ISM eased, at 52.7 the sector remains in “expansionary” territory.
In the UK, the Bank of England raised rates by 25bps, taking the Bank Rate to 5.25% (a high since early-2008). This was the 14th straight meeting the BoE hiked rates. Heading into the meeting there was some chance the BoE could deliver another 50bp increase, indeed 2 of the 9 member committee voted for a larger move. Given the still high UK inflation the BoE has kept the door to doing more, but with settings now deemed to be “restrictive” further moves are likely to be much more data dependent.
Across other markets the lift in bond yields exerted a bit more downward pressure on equities. The US S&P500 slipped back 0.3%. It was a more positive day for commodities, with base metals like copper higher (+1.2%). Oil (+2.5%) also posted strong gains after Saudi Arabia extended its 1 million barrels per day production cut into September, and noted that this can “be extended, deepened”. FX markets were more subdued. The USD Index consolidated, with EUR hovering around ~$1.0940 and USD/JPY (-0.5%) back down near ~142.50. GBP is little changed (now ~$1.2713) with the BoE decision largely as anticipated, while the AUD is tracking at ~$0.6550.
Today’s market focus will be on the monthly US labour market report (10:30pm AEST). The jobs data is something the US Fed has pointing to as being an important input into its late-September decision. As highlighted throughout this week, based on various leading indicators, we think risks are tilted to the US jobs report coming in better than predicted. If realised, this may see pricing for another US Fed rate rise lift and/or see future rate cut expectations pushed out, supporting the USD.
Global event radar: US Jobs (Tonight), US CPI (10th Aug), China Activity Data (15th Aug), US Retail Sales (15th Aug), RBNZ Meeting (16th Aug), UK CPI (16th Aug), Japan CPI (18th Aug), Eurozone PMIs (23rd Aug), Jackson Hole Symposium (24-26th Aug).
AUD corner
The AUD has held steady over the past 24hrs. As outlined above, despite the upswing in bond yields, FX markets have been quite. AUD/USD (now $0.6550) is just above its ~2-month lows, while on the crosses AUD/EUR remains sub ~0.60 and is a whisker away from its year-to-date low. AUD/GBP (now ~0.5152) continues to track near its lowest level since May 2020 in the wake of last night’s latest BoE rate hike. AUD/JPY (now ~93.35) has lost a bit more ground, and we remain of the view that over the next year the JPY should continue to outperform the AUD with the pair projected to move down into the high 80s (see Market Wire: BoJ Loosens Its Grip)
Locally, Q2 retail sales volumes showed that higher interest rates and other cost of living pressures are constraining spending. Volumes, which are a better guide to underlying demand given they strip out higher price impacts, fell 0.5%. This is the first time since 2008 that volumes have declined for 3 straight quarters. In our view, weak consumer confidence and the accumulated cash flow hit from higher mortgage costs points to further weakness in spending over the period ahead. The RBA’s more detailed economic projections are released today (11:30am AEST). The numbers should show inflation trending back into the target band by late-2025, with GDP growth set to be sluggish for some time. The stepdown in consumption and growth risks looks to have become more of a focus for the RBA. These downside risks suggest that no further rate hikes are likely unless the economy and inflation positively surprise.
We think the reduced RBA rate hike expectations, coupled with slowing global industrial activity, and a firmer USD may keep the AUD weighed down over the near-term. As mentioned, we believe the US labour market data (10:30pm AEST) could exceed predictions, which in turn may give the USD another shot in the arm. That said, as flagged before, we don’t want to be overly bearish the AUD around current levels. Fundamental supports such as Australia’s current account surplus (now ~1.4% of GDP) and the high level of the terms-of-trade should act as downside cushions. Since 2015 the AUD has only traded sub-$0.6550 ~4% of the time. With seasonal trends set to become more positive for the AUD (and negative for the USD) later this year, and with the JPY and CNH projected to strengthen on the back of the BoJ’s shift in stance and more growth-friendly stimulus in China, we continue to see the AUD grinding back into the low 0.70’s by mid-2024.
AUD event radar: US Jobs (Tonight), US CPI (10th Aug), AU Wages (15th Aug), China Activity Data (15th Aug), US Retail Sales (15th Aug), RBNZ Meeting (16th Aug), UK CPI (16th Aug), AU Jobs (17th Aug), Japan CPI (18th Aug), Eurozone PMIs (23rd Aug), Jackson Hole Symposium (24-26th Aug).
AUD levels to watch (support / resistance): 0.6403, 0.6500 / 0.6664, 0.6732
SGD corner
USD/SGD’s upturn paused for breath with the pair remaining in a tight range centered on ~$1.3415 over the past 24hrs. As outlined, while the sell off in bond yields has continued, FX markets have been more contained with the USD Index treading water overnight. On the crosses, EUR/SGD is just above its 50-day moving average (~1.4664), while SGD/JPY has dipped back down towards ~106.25 with the JPY outperforming overnight.
As mentioned, in our judgement, tonight’s US labour market report (which will be a key input in the Fed’s late-September policy deliberations) risks exceeding analyst expectations. A still strong US labour market could see markets add to their near-term US Fed rate rise bets, and/or push out future rate cut expectations. This could give the USD (and USD/SGD) a boost into the end of the week.
SGD event radar: US Jobs (Tonight), US CPI (10th Aug), China Activity Data (15th Aug), US Retail Sales (15th Aug), UK CPI (16th Aug), Japan CPI (18th Aug), Singapore CPI (23rd Aug), Eurozone PMIs (23rd Aug), Jackson Hole Symposium (24-26th Aug).
SGD levels to watch (support / resistance): 1.3140, 1.3200 / 1.3440, 1.3510